7 Factors That Affect the Stock Market

The stock market can be a volatile place. While certain aspects of the stock market can be loosely predicted, there are many outside influences that can have a huge impact on how the stock market performs day-to-day.

Whether you’re a seasoned veteran or just starting your career as a day trader, it’s important to understand what influences the stock market. While traders and analysts agree that there are endless factors that can affect the stock market, what follows are seven of the most common.

1. Interest Rates

In the United States, interest rates are determined by the Federal Reserve Board and change periodically.

When interest rates drop, investors tend to buy more shares. Lower interest rates translate to less risk, making the stock market a very attractive way to invest. This surge in purchasing also results in an overall economic boost.

On the flip side, higher interest rates often cause investors to sell in favor of more stable, government-backed investment options such as bonds.

2. Investor Emotion

Psychology plays a huge roll in the stock market, where the moods of investors can cause extreme swings in share prices.

For example, a bear market can be the result of bad news that causes anxious or fearful investors to sell. This panic to sell quickly can be one of the catalysts in starting a recession.

By contrast, a bull market can be brought on by good news and confident investors whose hopeful mood can encourage others to buy. This kind of optimism is common toward the end of a recession when investors believe that it is safe to buy again.

3. Company and Industry Performance

Changes within a company, or even an entire industry, can have a huge effect on stock prices. Even the very anticipation of a change or announcement can cause investors to buy or sell. Announcements that can cause the stock market to fluctuate include:

Earnings reports or estimations

Mergers/acquisitions

New product releases

Product recalls

Layoffs

Scandals (e.g. fraud, misconduct, etc.)

Not only can any of these things affect a single company’s stock, but they can also have an effect on their entire industry. For example, if a fast-food chain announces they are opening 100 new locations, it can have an impact on other fast-food chains’ stock prices as well.

4. Inflation and Deflation

Inflation is the term for the rate at which the cost of producing, shipping, and selling goods increases. Inflation can cause companies to cut back on spending in an effort to save money which, in turn, causes the price of stocks to drop. This often causes many investors to sell.

Deflation is when the cost of manufacturing and selling goods goes down. Despite the fact that this sounds like a good thing, deflation can actually be bad in that it gives investors the impression that the market is weak.

5. Exchange rates

Companies who conduct business with other countries have to pay close attention to exchange rates. If the rates change unfavorably, the cost of doing business overseas can go up, causing stock prices to fluctuate.

6. Politics

Most politicians get their campaign contributions from just a few individuals and, typically, these wealthy benefactors represent massive companies or entire industries. When so many businesses have their fingers in the political pie, election season has a huge impact on the stock market.

Foreign politics can have an effect on the U.S. stock market as well. Political shifts in countries we are trading with or who we are involved in a conflict with can directly impact investors and how they trade.

7. World Events

Aside from politics, there are a number of other world events (economic and otherwise) that can influence the stock market, including:

Natural disasters (hurricanes, tornadoes, etc.)

Terrorist attacks

Oil spills

Nuclear power plant failures

Riots/civil unrest

Significant changes in government structure

Do you want to become a successful day trader but find yourself intimidated by the potential uncertainties? Day Trader Architects can help you realize your dream. We have years of experience identifying factors that may affect the market and your daily trades. We teach our students to make good trading decisions by observing visual patterns and adapting accordingly.